We develop a theory of the firm in which
the willingness of workers to cooperate with each other plays a central
role. We study a dynamic principal-agent problem. In each period,
the firm (the principal) chooses an incentive intensity (how much to pay
workers per-unit of measured output) and the employees (the agents) allocate
effort between individual production and tasks that involve cooperating
with other employees. Following the literature on organizational
behavior, (i) employees are willing to engage in cooperative tasks even
when these tasks are less effective at increasing their measured output
and (ii) the level of cooperation is increasing in past levels of cooperation
in the firm and decreasing in the incentive intensity. Hence, an
increase in the incentive intensity does not just increase current effort,
it has important dynamic consequences: future employee cooperativeness
falls. We show how the firm balances these two effects to maximize
its lifetime profits. By extending the set of employee motivators
beyond the purely financial, we are able to introduce a precise definition
of corporate culture and to show how firms optimally manage their culture.
Our theory helps explain why different firms, placed in similar "physical"
circumstances, choose different incentive systems. It also helps
explain how corporate culture can be a hard-to-imitate asset which yields
some firms excess profits.
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